Establishing a Clothing Boutique

Part A You and Marsha, a good friend from your college days, have decided to open a trendy clothing boutique. You have found a location that looks promising and retained legal counsel to negotiate a lease with the landlord and prepare any paperwork you might be required to register the business with the state. Unfortunately, you cannot agree on how to set up your business. Marsha favors a partnership and you prefer to incorporate. The two of you schedule an appointment with your attorney to discuss the pros and cons of each, as well as other options that the two of you may have overlooked. In table format, summarize the advice your attorney provides for a general partnership, limited liability partnership, public corporation, and sub-chapter S corporation. His advice should include: tax ramifications, control considerations, liability, ease and expense of formation, transferability of ownership, and ease of expanding the business. Consult Chapters 16 and 17 of your textbook.

Part B You and Marsha realized after your last meeting with your attorney that you neglected to ask him about the duties you will owe each other if you decide to go with a general partnership formation. You schedule a second meeting with him. Summarize the duties and rights each of you has under a general partnership.

Part C Visit www.mycorporation.com. Watch the following very short videos that are available: LLC v. Corporation, Where Do I Incorporate, and What’s Next? Summarize the results of each video.

Part D Marsha envisions that down the road the two of you may wish to produce your own clothing line. She wants to manufacture the garments in China or India. You have reservations about expanding your operations outside the U.S. Locate five (5) scholarly articles that are devoted to the topic of expropriation risk, including creeping expropriation. Once you have compiled your articles, draft an argument in which you take a stance for or against manufacturing your clothing outside the U.S. You must support your opinion with evidence and research. In the event the research favors a country other than China or India, discuss your reasoning. Remember to consider the advantages/disadvantages of producing clothing made and sold in the USA. Your discussions should address environmental concerns and the impact outsourcing will have on American workers. Consult all relevant chapters of your textbook. Feel free to supplement your argument with case law reviewed in the textbook or case law you unearth during the course of your rese

ANSWER

Business structure and Expropriation risk

Introduction

Starting a business requires one to have thoroughly researched and thought carefully about the type of entity to start, the location, the availability of raw materials and where to manufacture. The consideration of the type of entity can best be advised by an attorney or an accountant. Further information from (Keightley, 2013) and (Skripak, 2016), displayed in Table 1, will help Marsha and I make a well-considered decision. Research on the duties and rights of partners if we settle on a general partnership, as well as research on expropriation risk, creeping expropriation and the possibility of outsourcing our cloth manufacturing unit will be of utmost importance in the decision-making process.

Business structure

Table 1: Pros, cons and properties of various business structures

Duties and rights under general partnership

As general partners, we owe each other a duty of reasonable care in how we conduct our business activities. Marsha and I will be expected to maintain good faith and loyalty to the partnership, be obedient, to provide complete information on all business matters and to properly maintain correct records.

We will both have management rights to the business. General partners have equal rights in the management of the partnership, in profit sharing, an inspection of books, loan repayment, interest payment, capital distribution, indemnity, contribution and sharing of the property and surplus of the firm upon dissolution (Twomey et al., 2016).

LLC vs Corporation

In starting a business, one of the first considerations to make is the type of entity. Two main types of entities are a corporation and a limited liability company (LLC). One may want to consider potential tax advantages, and as a result of this, one of the first resources in the business is an accountant to consult. Another consideration is whether the business will have investors. In the case that there will be investors, one may prefer a corporation as it can issue shares. The disadvantage of a corporation is that it is taxed at the corporate and individual levels. However, it can go public, making it easier for a corporation to obtain capital from venture capitalists as they prefer it to an LLC.

An LLC is a hybrid business that can enjoy the advantages of a corporation like limited liability and those of a partnership or sole proprietorship, like passing the tax through to its owners. As compared to corporations, LLCs are easier to maintain and more flexible than corporations (Learning Center, 2020). They are also suitable for single owners or partners. Over time, the type of entity that will suit your business can change. In this case, one can file a conversion to change the type of entity.

Where do I incorporate?

The easiest place to incorporate or start an LLC is in the home state of the business, where the office is based. Incorporating or forming an LLC in the home state simplifies tax returns. Doing business in a state other than its home state requires one to qualify to do business in both the home state and the other state, and one has to file two returns. If one intends to operate in multiple states, it is recommended that they consult an accountant for information about filing fees and tax laws that are favourable, and other aspects of operating in the various states (Learning Center, 2020).  Wherever one chooses to incorporate, it is essential to take maximum advantage of tax savings, protect their personal assets and ensure that legitimacy is added to their business.

What next after forming a corporation or LLC?

Formation of a corporation or LLC is a process that can be broken down into a few steps. The first step is obtaining an Employer Identification Number (EIN) or Tax ID for purposes of hiring employees and opening a bank account. Secondly, filing for trademark protection and obtaining a domain name is important for protecting the brand. Applying for business licenses is the third step. The business license requirements will vary depending on the location and entity type. Fourthly, it is necessary to file the annual maintenance documents such as the Annual Reports. Documentation of changes in the operating agreement or by-laws is important, ensuring that new owners or investors are included, and change of financial standing or roles is noted (Learning Center, 2020). Finally, it is crucial to ensure that the business is done in a state where it is qualified and permitted if it is outside its home state.

Expropriation risk and creeping expropriation

Expropriation is where the government seizes a firm’s ownership or rights of control. The government finds it appealing that they don’t have to incur investment costs as the firm comes with instant benefits. When a firm decides to undertake investment, it operates it and may choose to shut it down whenever it deems it unprofitable. The government, then, decides when to expropriate it, driven by the urge to maximize national income, obtain insurance, or even punish foreign multinationals. The firm may then decide to withdraw entirely or partially from the host country (Ochoa et.al, 2015). A government only incurs a reputation cost, which is considered exogenous. The expropriated firm could be offering essential or non-essential services. The government should pay the maximum possible compensation, but in most cases, it compensates essential goods and services higher than the latter.

Under international law, expropriation is a sovereign rate to the state but it is expected to fulfil certain conditions for it to be termed as legal. The property must be taken in accordance with the due legal process, for the public interest, should not be discriminatory and must be compensated (UNCTAD, 2012). Expropriation can be direct (mandatory transfer of title or outright physical acquisition by the State) or indirect (seizure of an investment without formal transfer of the title or outright acquisition).

Creeping expropriation is the kind of expropriation that takes place step by step, and is recognized in international law. Its counterpart is in the case where there is a breach comprising a combination of acts (Schreuer, 2005). It consists of a denial of access to the judicial system, non-payment, exclusion, legal blocking, cancellation, unfair treatment, non-compensation, and so forth. The state might carry out creeping expropriation without directly claiming to seize property or infringe on the rights of a foreign investor but by appointing an intrusive and unreasonable government official who frustrates the investor or by fixing unreasonable prices to commodities that will destroy a firm’s economic viability or by refusing to hold government officials accountable for their failure in carrying out their assignments (Sloane & Reisman, 2004). Referring to case law, the Government of Somalia was accused of creeping expropriation when it indirectly harassed a foreign investor of a processing facility processing shellfish by arresting their key employees, nationalizing an oil depot which was part of the project and blocking access to the site (Sloane & Reisman, 2004). The investor was then compelled to terminate their operations in Somalia. Upon confirming these facts with the US State Department, OPIC decided that the Somalian government exercised creeping expropriation on the foreign investor

The US has an International Centre for the Settlement of Investment Disputes, which offers a forum for bringing up any disputes such as those concerned with expropriation. However, no matter how legally binding it is, it can’t force the host country to pay more compensation than it is willing to. In the US, compensation is required to be adequate, timely and effective (Thomas & Worrall, 1994). The Export-Import Bank backs up investments to withdraw support loans from agencies associated with expropriating countries and impose aid sanctions

Outsourcing versus manufacturing in the US

Even with these positive points to note, the fact is that the most cost-effective and logical thing to do is to outsource manufactured clothing rather than manufacture in the US. Manufacturing in the US would increase prices of goods, as labour costs are significantly higher in the US than in other countries. The workers would have to learn new skills and the variety of goods would be reduced. Availability of skilled workers for the mass production of goods in the US is limited. Also, the number of factories is low and limited to a few varieties of goods that may not be sufficient for the production that one needs. Mass production is best done in Mexico and China, where there is skilled labour that is affordable and there is specialization in variety. A few advantages of manufacturing in the US can be noted, including job creation, reduced distribution costs. However, these would only be realized after the implementation of a Shop Floor Control System (“Manufacturing in America: The Real Benefits and the Drawbacks of Reshoring”, 2020).

Outsourcing has several effects on American workers. First, the domestic employment of American workers decreases. This is because accessing labour abroad is cheaper than getting it from within the US. Labour becomes more productive when outsourced due to the introduction of new skills into the market. Outsourcing hurts low-skilled labour and a positive effect on high-skilled labour because the tasks of the low-skilled workers are more likely to be outsourced than those of the highly-skilled workers. Also, low-skilled labour is cheaper abroad than domestically. However, when service provision (such as product design) is outsourced, the effect on both sets of workers is the same and has a net positive effect on the American labour market (Barbe & Riker, 2018). Finally, the net impact on American workers is not only influenced by outsourcing but also by technological change, where capital substitutes labour in some cases. It is difficult to know what percentage of effects on American workers can be attributed to either outsourcing or technological change.

China has for a long time been on top of the market in garment construction and exportation due to its ability to produce massively, its good infrastructure, massive labour force and labour productivity. However, countries like Vietnam, India, Bangladesh and Mexico have been rising the ladder to compete with China in this trade (Moorman& Harrington, 2020). Vietnam and India are close to China and can easily access raw materials from China. Bangladesh has significantly cheaper labour than the other countries but their infrastructure is poor. Mexico is nearer to the US and importing from Mexico would cost less shipping costs, but their labour cost is high. With the increasing labour cost in China, poor infrastructure in Bangladesh, and fragmented policies of the local government in India, Vietnam would be the most preferable country for a small to medium-sized company to outsource garment construction to. The ease of doing business in Vietnam is significantly high due to their stable economic policies, lower cost of labour, highly-efficient labour and already established factories, processes and systems and focus on international trade (“Manufacturing in America: The Real Benefits and the Drawbacks of Reshoring”, 2020).

Conclusion

In light of the research carried out, Marsha and I find it favourable to start our trendy boutique as a general partnership as it is easier and less expensive to start. The manufacturing unit will be best located in Vietnam. This will not have significant tax implications on our business as it is a partnership. However, with the help of our accountant and attorney, we will require to obtain the qualification to do business in Vietnam, as well as the estimated cost.

References

Barbe, A., & Riker, D. (2018). The Effects of Offshoring on US Workers: A Review of the          Literature. J. Int’l Com. & Econ., 1.

Keightley, M. P. (2013). Brief Overview of Business Types and Their Tax Treatment.        Congressional Research Service.

Learning Center, 2020. LLC Vs. Corporation – What Is The Difference Between An LLC And A            Corporation?. [online] MyCorporation. Available at:            <https://www.mycorporation.com/learningcenter/llc-vs-corporation.jsp#play> [Accessed 13 July 2020].

Learning Center, 2020. What Comes Next After Incorporation?. [online] MyCorporation. Available at: https://www.mycorporation.com/learningcenter/what-comes-next.jsp           [Accessed 13 July 2020].

Learning Center, 2020.. Where Should I Start My Business?. [online] MyCorporation. Available  at: https://www.mycorporation.com/learningcenter/where-should-i-incorporate.jsp      [Accessed 13 July 2020].

Manufacturing in America: The Real Benefits and the Drawbacks of Reshoring. (2020).   Retrieved 13 July 2020, from https://www.cgsinc.com/blog/manufacturing-america     -benefits-and-drawbacks-reshoring

Manufacturing in America: The Real Benefits and the Drawbacks of Reshoring. (2020).   Retrieved 13 July 2020, from https://www.cgsinc.com/blog/manufacturing-america     -benefits-and-drawbacks-reshoring

Moorman, P., & Harrington, W. (2020). 5 Countries to Which You Can Outsource Apparel          —Outside of China | Sourcify. Retrieved 14 July 2020, from         https://www.sourcify.com/5-countries-to-which-you-can-outsource-apparel-outside-of  -china/

Ochoa, D. C. R., Correia, R., Peña, J. I., & Población, J. (2015). Expropriation risk, investment    decisions and economic sectors. Economic Modelling, 48, 326-342.

Sequel, E. A., & Sequel, T. A. United Nations Conference on Trade and Development      (UNCTAD) Series on Issues in International Investment Agreements II.

Skripak, S. J. (2016). Fundamentals of business. Virginia Tech.

Thomas, J., & Worrall, T. (1994). Foreign direct investment and the risk of expropriation. The     Review of Economic Studies, 61(1), 81-108.

Twomey, D. P., Jennings, M. M., & Greene, S. M. (2016). Anderson’s Business Law and the        Legal Environment, Comprehensive Volume. Nelson Education.